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CEIC Russia Data Talk - January 9, 2015
The rouble plummeted from a monthly average of RUB 34.41/USD in June 2014 to RUB 45.86/USD in November 2014 followed by a similar trend in global oil prices. As the rouble reached its lowest value of RUB 67.7851/USD on December 18, it stirred panic on the financial markets causing it to fall even further during the daily session of foreign exchange trade, before recovering marginally towards the beginning of 2015 to RUB 56.2376/USD on January 1st. Although that is the latest rate reported by the Central Bank of Russia before the long Orthodox Christmas holidays, the rouble has continued its descent on the global financial markets in early January.
The Russian population quickly looked for ways to preserve their purchasing power by accumulating foreign currencies, mostly US Dollars and Euros. With the composition of ordinary citizens’ currency holdings leaning increasingly away from the domestic currency, the country is under mounting risk of a widespread confidence crisis in the rouble. According to historical foreign currency cash flows since 1999 the biggest surge was observed in December 2008 with a record value of foreign currency purchases equivalent to USD 14.3 billion, though that total might be exceeded in this present crisis. According to the most recent statistics from the Central Bank of Russia, in October 2014 USD 8.6 billion of foreign currency was sold to individuals – the largest monthly amount since 2008 – causing a negative balance of USD 6.3 billion as foreign currency purchased by the central bank from individual only slightly exceeded USD 2.3 billion. It is expected that the November and December 2014 foreign currency flow data might hit new records as the rouble slumped.
Another indication of the crisis is the increasing withdrawals from personal banking accounts in foreign currency in October 2014 (amounting to USD 4.8 billion, compared to USD 3.9 billion in September), causing a negative balance between foreign currency withdrawals and deposits in the commercial banks for three consecutive months from August to October 2014. This puts pressure on the banking system and might create a domino effect of bank runs. However, the general population still entrusted their assets to the banking system as the volume of foreign currency deposits grew by 25.9% on a monthly basis in October 2014 to USD 4.5 billion. This provides some evidence of Russians’ confidence in their financial system and of the effectiveness of the increasing deposit rates, even though locals don’t trust the rouble and prefer to swap their rouble deposits into foreign currencies.
The central bank responded with various measures to stabilize the situation and managed to break the depreciating rouble trend through to mid-December 2014, at least temporarily. The key policy interest rate was raised several times during the year, starting as early as March 2014 with a 2.5% increase, but that did not stop the rouble from falling. A more drastic increase from 9.5% to 17% occurred on December 16, 2014, when the situation started to get out of control. In response, commercial banks raised their deposit rates in an attempt to retain clients, and tightened rates on consumer loans.
The central bank also had to prop up the rouble with additional currency interventions on the foreign exchange market. US dollar sales reached a record of USD 27.2 billion in October 2014. International reserves in foreign currency consequently gradually depleted from USD 461.7 billion in November 2013 to USD 361.4 billion a year later. To avoid further draining international reserves (which are still remarkably plentiful), the central bank decided to speed up the transition to the floating exchange rate by abandoning the currency band as of November 2014 instead of the planned date of January 2015, but reserving the right for additional interventions, if necessary, which continued until December 2014. Additional scrutiny measures, such as monitoring commercial bank currency transactions, were also implemented. Selected major exporters were requested by the government to gradually sell their portions of accumulated foreign currency on the foreign exchange market to the level they had as of October 1, 2014. All these measures stabilized the rouble after mid-December for a limited time.
Persistently declining oil prices since June 2014 are the principal cause of the rouble’s devaluation due to Russia’s dependence on oil and gas exports. The subsequent tightening of monetary policy (raising borrowing costs), coupled with western sanctions restricting access to foreign financing, and other unresolved structural problems, has already slowed the Russian economy; a more competitive exchange rate would normally benefit exporters but the Russian economy is comparatively undiversified. Inflation is expected to pick up when Russian importers and producers start to raise their prices. Given the further decline in oil prices (testing the $50/barrel mark in early January) the Russian economy seems to be unavoidably slumping into recession.
By Alexander Dembitski - CEIC AnalystDiscuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription.
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